UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
Commission File No. 0002-25767
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Belair Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street, Boston, Massachusetts 02109
- --------------------------------------- -----
Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
---------------------------
None
----
Former Name, Former Address and Former Fiscal Year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
Page 1 of 20
Belair Capital Fund LLC
Index to Form 10Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of March 31, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Changes in Net Assets
(unaudited) for the Three Months Ended March 31, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2001 and 2000 7
Notes to Condensed Consolidated Financial Statements as of
March 31, 2001 (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
March 31,
2001 December 31,
(Unaudited) 2000
-------------- --------------
Assets:
Investment in Belvedere Capital LLC $1,890,271,327 $2,132,795,139
Investment in real estate partnership
preference units 470,447,787 439,043,259
Investment in other real estate 158,124,708 157,812,925
Short-term investments 1,598,519 6,665,871
-------------- --------------
Total investments $2,520,442,341 $2,736,317,194
Cash 2,347,964 46,875,064
Dividends receivable 6,311,410 8,021,686
Deferred expenses 1,343,453 1,379,102
Escrow deposits - restricted 2,449,184 2,143,464
Swap interest receivable - 526,653
Other assets 59,565 286,469
-------------- ---------------
Total assets $2,532,953,917 $2,795,549,632
-------------- --------------
Liabilities:
Loan payable $ 618,000,000 $ 643,000,000
Mortgage payable, net of unamortized
debt issuance costs 111,129,027 111,088,447
Open interest rate swap contracts, at value 19,002,862 4,834,653
Swap interest payable 1,085,544 -
Security deposits 413,684 394,546
Rents received in advance 78,101 55,276
Accrued expenses:
Interest expense 5,906,559 7,430,119
Accrued property taxes 826,717 659,702
Other accrued expenses and other liabilities 765,724 4,117,528
Minority interest in controlled subsidiaries 12,666,707 12,971,521
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Total liabilities $ 769,874,925 $ 784,551,792
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Net assets $1,763,078,992 $2,010,997,840
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Shareholders' Capital
-------------- --------------
Shareholders' capital $1,763,078,992 $2,010,997,840
-------------- --------------
Shares Outstanding 14,968,378 15,106,086
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Net Asset Value and Redemption Price
Per Share $117.79 $133.13
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3
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of
Operations (Unaudited) Three months Three months
ended ended
March 31, March 31,
2001 2000
------------ ------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $30,320
and $39,890, respectively) $ 4,734,583 $ 4,988,137
Interest allocated from Belvedere Capital 851,914 835,716
Expenses allocated from Belvedere Capital (3,067,499) (3,302,893)
------------- -------------
Net investment income allocated from
Belvedere Capital $ 2,518,998 $ 2,520,960
Dividends from partnership preference units 11,133,216 13,688,594
Rental income 5,979,865 -
Interest 172,994 78,742
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Total investment income $ 19,805,073 $ 16,288,296
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Expenses:
Investment adviser fees $ 1,738,712 $ 1,717,539
Property management fees 238,841 -
Service fees 200,118 220,311
Interest expense on credit facility 10,369,359 11,036,243
Interest expense on mortgages 2,386,111 -
Interest expense on swap contracts 735,861 271,780
Property and maintenance 1,463,057 -
Property taxes and insurance 585,744 -
Legal and accounting services 49,000 139,664
Amortization of deferred expenses 35,649 27,365
Custodian and transfer agent fees 14,813 14,244
Printing and postage 2,439 2,493
Miscellaneous 293,851 32,800
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Total expenses $ 18,113,555 $ 13,462,439
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Net investment income before minority interest
in net income of controlled subsidiary 1,691,518 2,825,857
Minority interest in net income of
controlled subsidiary (15,751) -
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Net investment income $ 1,675,767 $ 2,825,857
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4
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 6,043,693 $ 31,852,646
Investment transactions in partnership
preference units (identified cost basis) (1,142,610) (2,897,594)
-------------- -------------
Net realized gain $ 4,901,083 $ 28,955,052
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Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital (identified
cost basis) $(255,144,565) $ 93,538,225
Investments in partnership preference units
(identified cost basis) 32,547,138 (13,680,764)
Interest rate swap contracts (14,168,209) 5,252,030
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Net change in unrealized
appreciation/(depreciation) $(236,765,636) 85,109,491
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Net realized and unrealized gain (loss) $(231,864,553) $114,064,543
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Net increase (decrease) in net assets from
operations $(230,188,786) $116,890,400
============== =============
5
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
-------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 1,675,767 $ 2,825,857
Net realized gain on investment transactions 4,901,083 28,955,052
Net change in unrealized appreciation
(depreciation) of investments (236,765,636) 85,109,491
-------------- --------------
Net increase (decrease) in net
assets from operations $ (230,188,786) $ 116,890,400
--------------- ---------------
Transactions in Fund Shares -
Net asset value of Shares redeemed $ (17,411,099) $ (65,691,137)
--------------- ---------------
Net decrease in net assets from Fund
Share transactions $ (17,411,099) $ (65,691,137)
--------------- --------------
Distributions to Shareholders
Special distributions to Shareholders $ - $ (5,230,561)
Minority shareholder of controlled
subsidiary (318,963) -
--------------- ---------------
Total distributions $ (318,963) $ (5,230,561)
--------------- ---------------
Net increase (decrease) in net assets $ (247,918,848) $ 45,968,702
Net assets:
Beginning of period $2,010,997,840 $2,094,369,753
-------------- --------------
End of period $1,763,078,992 $2,140,338,455
============== ==============
6
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
-------------- --------------
Cash Flows From (For) Operating Activities -
Net investment income $ 1,675,767 $ 2,825,857
Adjustments to reconcile net investment income to net
cash flows used for operating activity -
Amortization of deferred expenses 35,649 27,365
Amortization of debt issuance costs 40,580 -
Net investment income allocated from Belvedere Capital (2,518,998) (2,520,960)
(Increase) decrease in dividends receivable 1,710,276 (8,137,890)
Increase in interest payable for open swap contracts 1,612,197 224,030
Increase in escrow deposits (305,720) -
Decrease in other assets 226,904 -
Increase in accrued property taxes 167,015 -
Decrease in accrued interest and operating expenses
and other liabilities (4,833,401) (1,054,087)
Increase (decrease) in minority interest (52,500) 159,500
Purchases of partnership preference units (9,386,616) (101,895,368)
Sales of partnership preference units 9,386,616 12,795,445
Improvements to property (311,783) -
Net (increase) decrease in investment in Belvedere Capital (19,414,176) 12,867,396
(Increase) decrease in short-term investments 5,067,352 (7,450,400)
Minority interest in net income of controlled subsidiary 15,751 -
-------------- --------------
Net cash flows used for operating activities $ (16,885,087) $ (92,159,112)
Cash Flows From (For) Financing Activities -
Proceeds from (payments for) loan $ (25,000,000) $ 90,000,000
Return of capital (268,065) -
Payments for Fund Shares redeemed (2,054,985) (440,373)
Distributions paid (318,963) -
-------------- --------------
Net cash flows from (used for) financing activities $ (27,642,013) $ 89,559,627
Net decrease in cash (44,527,100) (2,599,485)
Cash at beginning of period $ 46,875,064 $ 3,802,594
-------------- --------------
Cash at end of period $ 2,347,964 $ 1,203,109
============== ==============
Supplemental Disclosure and Non-cash Investing and
Financing Activities-
Change in unrealized appreciation of investments and
open swap contracts $(236,765,636) $ 85,109,491
Interest paid for loan $ 11,892,919 $ 12,014,184
Interest received (paid) for swap contracts $ 876,336 $ (47,750)
Interest paid for mortgages $ 2,345,531 -
Market value of securities distributed in payment of redemptions $ 15,356,114 $ 65,842,965
7
BELAIR CAPITAL FUND LLC as of March 31, 2001
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Organization
Belair Capital Fund LLC (Belair Capital) is a Massachusetts limited liability
company established to offer diversification and tax-sensitive investment
management to persons holding large and concentrated positions in equity
securities of selected publicly-traded companies. The investment objective of
Belair Capital is to achieve long-term, after-tax returns for Shareholders.
Belair Capital pursues this objective primarily by investing indirectly in
Tax-Managed Growth Portfolio (the Portfolio), a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended. The Portfolio is organized as a trust under the laws of the state of
New York. Belair Capital maintains its investment in the Portfolio by investing
in Belvedere Capital Fund Company LLC (Belvedere Capital), a separate
Massachusetts limited liability company that invests exclusively in the
Portfolio. The performance of Belair Capital and Belvedere Capital are directly
and substantially affected by the performance of the Portfolio. Separate from
its investment in the Portfolio through Belvedere Capital, Belair Capital
invests in real estate assets including income-producing preferred equity
interests in real estate operating partnerships (partnership preference units)
affiliated with publicly-traded real estate investment trusts (REITs) and
interests in controlled real property subsidiaries.
The accompanying condensed consolidated financial statements include the
accounts of Belair Capital, Belair Real Estate Corporation (BREC) and Bel
Residential Properties Trust (Bel Residential) (collectively, the Fund). All
material intercompany accounts and transactions have been eliminated.
2 Interim Financial Statements
The condensed consolidated interim financial statements of Belair Capital Fund
and subsidiaries as of March 31, 2001 and March 31, 2000 and for the three
months ended March 31, 2001 and March 31, 2000 have been prepared by the Fund,
without audit, pursuant to the rules and regulations of the Securities and
Exchange commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as permitted by
such rules and regulations. All adjustments, consisting of normal recurring
adjustments, have been included. Management believes that the disclosures are
adequate to present fairly the financial position, results of operations and
cash flows at the dates and for the periods presented. It is suggested that
these interim financial statements be read in conjunction with the financial
statements and the notes thereto included in the Fund's latest annual report on
Form 10-K. Results for the interim period are not necessarily indicative of
those to be expected for the full fiscal year.
3 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital for the
three months ended March 31, 2001 aggregated $63,122,364 and $59,064,302,
respectively, and for the three months ended March 31, 2000 aggregated $886,263
and $79,596,624, respectively. Purchases and sales of partnership preference
units aggregated $9,386,616 and $9,386,616, respectively, for the three months
ended March 31, 2001 and $101,895,368 and $12,795,445, respectively, for the
8
three months ended March 31, 2000. For the three months ended March 31, 2001 and
March 31, 2000, there were no acquisitions or sales of other real property.
Purchases and sales of parnership preference units during the three months ended
March 31, 2001 and March 31, 2000 include amounts purchased from and sold to
other funds sponsored by Eaton Vance Management (EVM).
4 Indirect Investment in Portfolio
Belvedere Capital's interest in the Portfolio at March 31, 2001 was
$9,248,868,309 representing 54.7% of the Portfolio's net assets and at March 31,
2000 was $8,634,584,697 representing 52.1% of the Portfolio's net assets. The
Fund's investment in Belvedere Capital at March 31, 2001 was $1,890,271,327
representing 20.4% of Belvedere Capital's net assets and at March 31, 2000 was
$2,277,261,355, representing 26.4% of Belvedere Capital's net assets. Investment
income allocated to Belvedere Capital from the Portfolio for the three months
ended March 31, 2001 totaled $25,944,565, of which $5,586,497 was allocated to
the Fund. Investment income allocated to Belvedere Capital from the Portfolio
for the three months ended March 31, 2000 totaled $20,402,874, of which
$5,823,853 was allocated to the Fund. Expenses allocated to Belvedere Capital
from the Portfolio for the three months ended March 31, 2001 totaled
$10,657,687, of which $2,290,377 was allocated to the Fund. Expenses allocated
to Belvedere Capital from the Portfolio for the three months ended March 31,
2000 totaled $8,688,745, of which $2,466,773 was allocated to the Fund.
Belvedere Capital allocated additional expenses to the Fund of $777,122 for the
three months ended March 31, 2001, representing $19,875 of operating expenses
and $757,247 of service fees. Belvedere Capital allocated additional expenses to
the Fund of $836,120 for the three months ended March 31, 2000, representing
$19,793 of operating expenses and $816,327 of service fees (Note 8).
A summary of the Portfolio's Statement of Assets and Liabilities, at March 31,
2001, December 31, 2000 and March 31, 2000 and its operations for the three
months ended March 31, 2001, the year ended December 31, 2000 and the three
months ended March 31, 2000 follows:
March 31, December 31, March 31,
2001 2000 2000
-------------------- -------------------- --------------------
Investments, at value $16,937,423,532 $18,318,105,043 $16,564,812,965
Other Assets 32,010,878 251,324,504 18,352,819
----------------------------------------------------------------------------------------------------------
Total Assets $16,969,434,410 $18,569,429,547 $16,583,165,784
Total Liabilities 59,756,296 184,360,662 2,651,935
----------------------------------------------------------------------------------------------------------
Net Assets $16,909,678,114 $18,385,068,885 $16,580,513,849
==========================================================================================================
Dividends and interest $ 48,190,173 $ 189,740,537 $ 40,223,600
Investment adviser fee 19,128,089 73,317,616 16,618,292
Other expenses 640,516 2,500,093 459,694
----------------------------------------------------------------------------------------------------------
Total expenses $ 19,768,605 $ 75,817,709 $ 17,077,986
----------------------------------------------------------------------------------------------------------
Net investment income $ 28,421,568 $ 113,922,828 $ 23,145,614
Net realized gains 52,532,750 196,962,539 224,041,217
Net change in unrealized (2,205,600,689) 141,360,943 597,012,900
gains(losses)
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $(2,124,646,371) $ 452,246,310 $ 844,199,731
----------------------------------------------------------------------------------------------------------
9
5 Rental Property
The average occupancy rate for real property held by Bel Residential, consisting
of 2,681 residential units, was approximately 96% at March 31, 2001 and
approximately 95% at December 31, 2000. The fair value of real property owned by
the Fund through Bel Residential at March 31, 2001 and December 31, 2000 is as
follows:
March 31, 2001 December 31, 2000
-------------- -----------------
Land $ 23,565,000 $ 23,565,000
Buildings, improvements and other assets 134,559,708 134,247,925
---------------------------------------
Fair value $158,124,708 $157,812,925
--------------------------------------
6 Cancelable Interest Rate Swap Agreements
The Fund may enter into cancelable interest rate swap agreements in connection
with its real estate investments and the associated borrowings. Under such
agreements, the Fund has agreed to make periodic payments at fixed rates in
exchange for payments at floating rates. The notional or contractual amounts of
these instruments may not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these investments is
meaningful only when considered in conjunction with all related assets,
liabilities and agreements. As of March 31, 2001 and December 31, 2000, the Fund
has entered into cancelable interest rate swap agreements with Merrill Lynch
Capital Services, Inc.
Unrealized Unrealized
Notional Initial Appreciation/ Appreciation/
Amount Optional (Depreciation) (Depreciation)
Effective (000's Fixed Floating Termination Maturity At March 31, At December 31,
Date omitted) Rate Rate Date Date 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
2/98 120,000 6.715% Libor+.45% 2/03 2/05 $ (2,260,815) $ 158,467
4/98 50,000 6.84% Libor+.45% 2/03 2/05 (1,092,426) (105,708)
4/98 150,000 6.835% Libor+.45% 4/03 4/05 (3,473,210) (413,833)
6/98 20,000 6.67% Libor+.45% 6/03 2/05 (423,810) 1,994
6/98 75,000 6.68% Libor+.45% 6/03 2/05 (1,608,922) (14,230)
6/98 80,000 6.595% Libor+.45% 6/03 2/05 (1,537,470) 181,644
11/98 14,709 6.13% Libor+.45% 11/03 2/05 (130,926) 210,991
2/99 34,951 6.34% Libor+.45% 2/04 2/05 (583,024) 221,768
4/99 5,191 6.49% Libor+.45% 2/04 2/05 (110,887) 6,770
7/99 24,902 7.077% Libor+.45% 7/04 2/05 (1,077,084) (524,587)
9/99 10,471 7.37% Libor+.45% 9/04 2/05 (571,489) (341,770)
3/00 19,149 7.89% Libor+.45% 2/04 2/05 (1,190,964) (809,750)
3/00 70,000 7.71% Libor+.45% - 2/05 (4,941,835) (3,406,409)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $(19,002,862) $(4,834,653)
- ----------------------------------------------------------------------------------------------------------------------------------
7 Debt
A Mortgage - Real property held by Bel Residential is financed through a loan
secured by cross-collateralized first mortgage liens on such real property. The
balances at March 31, 2001 and December 31, 2000, excluding unamortized debt
issuance costs, are as follows:
10
Monthly
Annual Interest Balance at Balance at
Maturity Date Interest Rate Payment* March 31, 2001 December 31, 2000
- ------------- ------------- -------- -------------- -----------------
May 1, 2010 8.33% $781,844 $112,630,517 $112,630,517
*Mortgage provides for monthly payments of interest only through May 1, 2010,
with the entire principal balance due on May 1, 2010.
B Credit Facility -- Belair Capital has obtained a $790,000,000 credit facility
(the Credit Facility) with a term of seven years from Merrill Lynch
International Bank Limited. Belair Capital's obligations under the Credit
Facility are secured by a pledge of its assets, excluding the assets of Bel
Residential. Interest on borrowed funds is based on the prevailing LIBOR rate
for the respective interest period plus a spread of 0.45% per annum. Belair
Capital may borrow for interest periods of one month to five years. In addition,
Belair Capital pays a commitment fee at a rate of 0.10% per annum on the unused
amount of the loan commitment. Borrowings under the Credit Facility have been
used to purchase qualifying assets, pay selling commissions and organizational
expenses, and to provide for the short-term liquidity needs of the Fund.
Additional borrowings under the Credit Facility may be made in the future for
these purposes. At March 31, 2001 and December 31, 2000, amounts outstanding
under the Credit Facility totaled $618,000,000 and $643,000,000, respectively.
8 Management Fee and Other Transactions with Affiliates
The Fund and the Portfolio have engaged Boston Management and Research (BMR), a
wholly-owned subsidiary of EVM, as investment adviser. Under the terms of the
advisory agreement with the Portfolio, BMR receives a monthly fee of 5/96 of 1%
(0.625% annually) of the average daily net assets of the Portfolio up to
$500,000,000 and at reduced rates as daily net assets exceed that level. For the
three months ended March 31, 2001 and March 31, 2000 the advisory fee applicable
to the Portfolio was 0.44% (annualized) and 0.44% (annualized), respectively, of
average daily net assets. Belvedere Capital's allocated portion of the advisory
fee was $10,312,208 of which $2,245,314 was allocated to the Fund for the three
months ended March 31, 2001, and $8,455,108 of which $2,389,163 was allocated to
the Fund, for the three months ended March 31, 2000. In addition, Belair Capital
pays BMR a monthly advisory and administrative fee of 1/20 of 1% (0.60%
annually) of the average daily gross investment assets of Belair Capital
(including the value of all assets of Belair Capital other than Belair Capital's
investment in BREC, minus the sum of Belair Capital's liabilities other than the
principal amount of money borrowed) and BREC pays BMR a monthly management fee
at a rate of 1/20th of 1% (equivalent to 0.60% annually) of the average daily
gross investment assets of BREC (which consist of all assets of BREC minus the
sum of BREC's liabilities other than the principal amount of money borrowed. For
this purpose, the assets and liabilities of BREC's controlled subsidiaries are
reduced by the proportionate interests therein of investors other than BREC).
The advisory fee payable by the Portfolio with respect to Belair Capital's
indirect investment in the Portfolio is credited toward Belair Capital's
advisory and administrative fee payment. For the three months ended March 31,
2001 and March 31, 2000, the advisory fee payable to BMR by the Fund, less the
Fund's allocated share of the Portfolio's advisory fee, totaled $1,738,712 and
$1,717,539, respectively.
11
EVM serves as manager of Belair Capital and receives no separate compensation
for services provided in such capacity.
Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance
Distributors, Inc. (EVD), Belvedere Capital pays a servicing fee to EVD for
providing certain services and information to Shareholders. The servicing fee is
paid on a quarterly basis at an annual rate of 0.15% of Belvedere Capital's
average daily net assets and totaled $3,524,790 and $2,876,452 for the three
months ended March 31, 2001 and March 31, 2000, respectively, of which $757,247
and $816,327, respectively, was allocated to Belair Capital. Pursuant to a
servicing agreement between Belair Capital and EVD, Belair Capital pays a
servicing fee to EVD on a quarterly basis at an annual rate of 0.20% of Belair
Capital's average daily net assets, less Belair Capital's allocated share of the
servicing fee payable by Belvedere Capital. For the three months ended March 31,
2001 and March 31, 2000, the servicing fee paid directly by Belair Capital
totaled $200,118 and $220,311, respectively. Of the amounts allocated to and
incurred by the Fund, for the three months ended March 31, 2001 and March 31,
2000, $957,365 and $1,036,638, respectively, were paid to subagents.
An affiliate of the minority shareholder of Bel Residential, provides day-to-day
management of Bel Residential pursuant to a management agreement. The management
agreement provides for a management fee and allows for reimbursement of payroll
expenses incurred by the manager for managing the properties owned by Bel
Residential. For the three months ended March 31, 2001, Bel Residential paid or
accrued management fees amounting to $ 238,841. There were no management fees
paid or accrued by Bel Residential for the three months ended March 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Increases and decreases in Belair Capital's net asset value per share are
derived from net investment income, and realized and unrealized gains and losses
on Belair Capital's interest (through Belvedere Capital) in the Portfolio, real
estate investments held through BREC and any direct investments of Belair
Capital. Expenses of Belair Capital include its pro-rata share of the expenses
of Belvedere Capital, and indirectly the Portfolio, as well as the actual and
accrued expenses of Belair Capital and BREC, including its subsidiary Bel
Residential. Belair Capital's most significant expense is interest incurred on
borrowings incurred in connection with its real estate investments. Belair
Capital's realized and unrealized gains and losses on investments are based on
its allocated share of the realized and unrealized gains and losses of Belvedere
Capital, and indirectly, the Portfolio, as well as realized and unrealized gains
and losses on investments in real estate through BREC. The realized and
unrealized gains and losses on investments have the most significant impact on
Belair Capital's net asset value per share and result from sales of such
investments and changes in their underlying value. The investments of the
Portfolio consist primarily of common stocks of domestic and foreign growth
companies that are considered to be high in quality and attractive in their
long-term investment prospects. Because the securities holding of the Portfolio
are broadly diversified, the performance of the Portfolio cannot be attributed
to one particular stock or one particular industry or market sector. The
performance of the Portfolio and Belair Capital are substantially influenced by
the overall performance of the United States stock market, as well as by the
relative performance versus the overall market of specific stocks and classes of
stocks in which the Portfolio maintains large positions. Through the impact of
interest rates on the valuation of Belair Capital's investments in Partnership
Preference Units through BREC and its positions in interest rate swap
agreements, the performance of Belair Capital is also affected by movements in
12
interest rates, and particularly, changes in credit spread relationships. On a
combined basis, Belair Capital's Partnership Preference Units and interest rate
swaps generally decline in value when credit spreads widen (as fixed income
markets grow more risk-averse) and generally increase in value when credit
spreads tighten.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001
The Fund achieved total return performance of -11.5% for the quarter ended March
31, 2001. This return reflects a decrease in the Fund's net asset value per
share from $133.13 to $117.79. For comparison, the S&P 500, an unmanaged index
of large capitalization stocks commonly used as a benchmark for the U.S. equity
market, had a total return of -11.9% over the same period.
During the first quarter of 2001, the U.S. equity market performed poorly. Stock
price declines were widespread, and were most severe in the formerly highflying
technology and telecom sectors. Biotech and other "aggressive growth" sectors
also experienced significant declines in the quarter. Value stocks outperformed
growth stocks, and small cap stocks bested large cap stocks. Among the better
performers in the quarter were capital goods, industrial, consumer durable and
retail stocks that are positioned to benefit from the lowering of short-term
interest rates engineered by the Federal Reserve during the quarter. These
stocks were, in many cases, trading at very depressed valuations levels at
year-end. In this difficult environment, the performance of the Portfolio
modestly exceeded that of the overall market. The relative performance of the
Fund versus the S&P 500 was aided by the Portfolio's modest outperformance,
which can be attributed to the Portfolio's valuation-sensitive investment
approach and its underweighting of most of the worst-performing market sectors.
In the fixed income markets, the first quarter saw stable interest rates on
benchmark government bonds and stable credit spreads. The series of rate cuts by
the Federal Reserve had little impact on the pricing of longer-term fixed income
obligations. Changes in valuation of the Fund's holdings of Partnership
Preference Units and other real estate investments had a modest negative impact
on the Fund's performance during the period.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2001, Belair Capital had outstanding borrowings of $618.0
million under the Credit Facility established with Merrill Lynch International
Bank Limited, the term of which extends until February 6, 2005. Belair Capital
has available under the Credit Facility $172.0 million to meet short-term
liquidity need and for other purposes.
Belair Capital may redeem shares of Belvedere Capital at any time. Both
Belvedere Capital and the Portfolio follow the practice of normally meeting
redemptions by distributing securities drawn from the Portfolio. Belvedere
Capital and the Portfolio may also meet redemptions by distributing cash. As of
March 31, 2001, the Portfolio had cash and short-term investments totaling
$380.4 million. The Portfolio participates in a $150 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings under the $150 million line of credit at March 31, 2001, and, as of
that date, the net assets of the Portfolio totaled $16,909.7 million. To ensure
liquidity for investors in the Portfolio, the Portfolio may not invest more than
13
15% of its net assets in illiquid assets. As of March 31, 2001, restricted
securities, which are considered illiquid, constituted 2.7% of the net assets of
the Portfolio.
The Partnership Preference Units held by BREC are not registered under the
Securities Act and are subject to substantial restrictions on transfer. As such,
they are considered illiquid.
BREC's investments in real estate apart from Partnership Preference Units is
also considered illiquid. Bel Residential has been structured as investments of
at least ten years (until 2010), at which time a buy/sell mechanism may offer a
measure of liquidity to both BREC and its minority shareholders.
Redemptions of Fund shares are met primarily by distributing securities drawn
from the Portfolio, although cash may also be distributed. Shareholders
generally do not have the right to receive the proceeds of Fund redemptions in
cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The value of Fund Shares may not increase or may decline. The performance of the
Fund fluctuates. There can be no assurance that the performance of the Fund will
match that of the United States stock market or that of other equity funds. In
managing the Portfolio for long-term, after-tax returns, the Portfolio's
investment adviser generally seeks to avoid or minimize sales of securities with
large accumulated capital gains, including contributed securities. Such
securities constitute a substantial portion of the assets of the Portfolio.
Although the Portfolio may utilize certain management strategies in lieu of
selling appreciated securities, the Portfolio's, and hence the Fund's, exposure
to losses during stock market declines may nonetheless be higher than that of
funds that do not follow a general policy of avoiding sales of
highly-appreciated securities.
The Portfolio invests in securities issued by foreign companies and the Fund may
acquire foreign investments. Foreign investments involve considerations and
possible risks not typically associated with investing in the United States. The
value of foreign investments to U.S. investors may be adversely affected by
changes in currency rates. Foreign brokerage commissions, custody fees and other
costs of investing are generally higher than in the United States, and foreign
investments may be less liquid, more volatile and more subject to government
regulation than in the United States. Foreign investments could be adversely
affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards, armed conflict, and potential difficulty in enforcing contractual
obligations.
Risks of Certain Investment Techniques
- --------------------------------------
In managing the Portfolio, the investment adviser may purchase or sell
derivative instruments (which derive their value by reference to other
securities, indices, instruments, or currencies) to hedge against securities
price declines and currency movements and to enhance returns. Such transactions
may include, without limitation, the purchase and sale of stock index futures
contracts and options on stock index futures; the purchase of put options and
the sale of call options on securities held; equity swaps; and the purchase and
sale of forward currency exchange contracts and currency futures. The Portfolio
may make short sales of securities provided that an equal amount is held of the
security sold short (a covered short sale) and may also lend portfolio
securities. The use of these investment techniques is a specialized activity
14
that may be considered speculative and which can expose the Fund and the
Portfolio to significant risk of loss. Successful use of these investment
techniques is subject to the ability and performance of the investment adviser.
The Fund's and the Portfolio's ability to meet their investment objectives may
be adversely affected by the use of these techniques. The writer of an option or
a party to an equity swap may incur losses that substantially exceed the
payments, if any, received from a counterparty. Swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that the investment adviser considers unfavorable.
The Portfolio's ability to utilize covered short sales, certain equity swaps and
certain equity collar strategies (combining the purchase of a put option and the
sale of a call option) as a tax-efficient management technique with respect to
holdings of appreciated securities is limited to circumstances in which the
hedging transaction is closed out within thirty days of the end of the
Portfolio's taxable year and the underlying appreciated securities position is
held unhedged for at least the next sixty days after such hedging transaction is
closed. There can be no assurance that counterparties will at all times be
willing to enter into covered short sales, interest rate hedges, equity swaps
and other derivative instrument transactions on terms satisfactory to the Fund
or the Portfolio. The Fund's and the Portfolio's ability to enter into such
transactions may also be limited by covenants under the Fund's revolving
securitization facility, the federal margin regulations and other laws and
regulations. The Portfolio's use of certain investment techniques may be
constrained because the Portfolio is a diversified, open-end management
investment company registered under the 1940 Act and because other investors in
the Portfolio are regulated investment companies under Subchapter M of the Code.
Moreover, the Fund and the Portfolio are subject to restrictions under the
federal securities laws on their ability to enter into transactions in respect
of securities that are subject to restrictions on transfer pursuant to the
Securities Act.
Interest Rate Risk
- ------------------
The Fund's primary exposure to interest rate risk arises from investments in
real estate Qualifying Assets that are financed with floating rate bank
borrowings. The interest rate on borrowings under the Fund's credit facility
(the "Credit Facility") is reset at regular intervals based on a fixed and
predetermined premium to LIBOR for short-term extensions of credit. The Fund
utilizes cancelable interest rate swap agreements to fix the cost of its
borrowings over the term of the Credit Facility and to mitigate the impact of
interest rate changes on the Fund's net asset value. Under the terms of the
interest rate swap agreements, the Fund makes cash payments at fixed rates in
exchange for floating rate payments that fluctuate with three-month LIBOR. The
interest rate swap agreements are valued on an ongoing basis by the investment
adviser. In the future, the Fund may use other interest rate hedging
arrangements (such as caps, floors and collars) to fix or limit borrowing costs.
The use of interest rate hedging arrangements is a specialized activity that may
be considered speculative and which can expose the Fund to significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Notes 6 and 7 to
the condensed consolidated financial statements.
15
Interest Rate Sensitivity
Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended March 31,
2002 2003 2004 2005 2006 Thereafter Total Fair Value
--------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- --------------
Long term debt-
variable rate 618,000,000 618,000,000 618,000,000
Credit Facility
Average interest
rate 5.29% 5.29%
Rate sensitive
derivative
financial
instruments:
- ---------------
Pay fixed/
Receive variable
interest rate
swap contracts 674,373,000 674,373,000 19,002,862
Average pay rate 6.86% 6.86%
Average receive
rate 5.29% 5.29%
Risks of Investing in Qualifying Assets and Leverage
- ----------------------------------------------------
The success of BREC's real estate investments depends in part on many factors
related to the real estate market. These factors include, without limitation,
general economic conditions, the supply and demand for different types of real
properties, the financial health of tenants, the timing of lease expirations and
terminations, fluctuations in rental rates and operating costs, exposure to
adverse environmental conditions and losses from casualty or condemnation,
interest rates, availability of financing, managerial performance, government
rules and regulations, and acts of God (whether or not insured against).
Partnership Preference Units also depend upon factors relating to the issuing
partnerships that may affect such partnerships' profitability and their ability
to make distributions to holders of Partnership Preference Units. BREC's
investment in a Real Estate Joint Venture may be influenced by decisions which
the Operating Partner of such Venture may make on behalf of the property owned
thereby and potential changes in the specific real estate sub-markets in which
the properties are located. The debt of each Real Estate Joint Venture is
fixed-rate, secured by the underlying properties and with limited recourse to
BREC. However, changes in interest rates, the availability of financing and
other financial conditions can have a material impact on property values and
therefore on the value of BREC's equity interest. There can be no assurance that
BREC's ownership of real estate investments will be an economic success.
Moreover, the success of any Real Estate Joint Venture investment depends in
large part upon the performance of the Operating Partner. Operating Partners
will be subject to substantial conflicts of interest in structuring, operating
and winding up the Real Estate Joint Ventures. Operating Partners will have an
economic incentive to maximize the prices at which they sell properties to Real
Estate Joint Ventures and to minimize the prices at which they acquire
properties from Real Estate Joint Ventures. Operating Partners may devote
16
greater attention or more resources to managing their wholly-owned properties
than properties held by Real Estate Joint Ventures. Future investment
opportunities identified by Operating Partners will more likely be pursued
independently, rather than through, the Real Estate Joint Ventures. Financial
difficulties encountered by Operating Partners in their other businesses may
interfere with the operations of Real Estate Joint Ventures.
Although intended to add to returns, the borrowing of funds to purchase real
estate investments exposes the Fund to the risk that the returns achieved on the
real estate investments will be lower than the cost of borrowing to purchase
such assets and that the leveraging of the Fund to buy such assets will
therefore diminish the returns to be achieved by the Fund as a whole. In
addition, there is a risk that the availability of financing will be interrupted
at some future time, requiring the Fund to sell assets to repay outstanding
borrowings or a portion thereof. It may be necessary to make such sales at
unfavorable prices. The Fund's obligations under the Credit Facility are secured
by a pledge of its assets. In the event of default, the lender could elect to
sell assets of the Fund without regard to consequences of such action for
Shareholders. The rights of the lender to receive payments of interest on and
repayments of principal of borrowings is senior to the rights of the
Shareholders. Under the terms of the Credit Facility, the Fund is not permitted
to make distributions of cash or securities while there is outstanding an event
of default under the Credit Facility. During such periods, the Fund would not be
able to honor redemption requests or make cash distributions.
The valuations of Partnership Preference Units held by the Fund through its
investment in BREC fluctuate over time to reflect, among other factors, changes
in interest rates, changes in the perceived riskiness of such units (including
call risk), changes in the perceived riskiness of comparable or similar
securities trading in the public market and the relationship between supply and
demand for comparable or similar securities trading in the public market.
Increases in interest rates and increases in the perceived riskiness of such
units or comparable or similar securities will adversely affect the valuation of
the Partnership Preference Units. The ongoing value of BREC's investments in
Real Estate Joint Ventures will be substantially uncertain. BREC's investments
in Real Estate Joint Ventures generally will be stated at estimated market value
based on independent valuations, assuming an orderly disposition of assets.
Detailed investment evaluations will be performed annually and reviewed
periodically. Interim valuations will reflect results of operations and
distributions, and may be adjusted to reflect significant changes in economic
circumstances since the most recent independent evaluation. Fluctuations in the
value of real estate investments derived from changes in general interest rates
can be expected to be offset in part (but not entirely) by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
the Fund with respect to its borrowings under the Credit Facility. Fluctuations
in the value of real estate investments derived from other factors besides
general interest rate movements (including issuer-specific and sector-specific
credit concerns, property-specific concerns and changes in interest rate spread
relationships) will not be offset by changes in the value of interest rate swap
agreements or other interest rate hedges entered into by the Fund. Changes in
the valuation of real estate investments not offset by changes in the valuation
of interest rate swap agreements or other interest rate hedges entered into by
the Fund will cause the performance of the Fund to deviate from the performance
of the Portfolio. Over time, the performance of the Fund can be expected to be
more volatile than the performance of the Portfolio.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
The Fund is not aware of any pending legal proceedings to which the Fund is a
party or to which their assets are subject.
Item 2. Changes in Securities and Use of Proceeds.
- ---------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
Item 5. Other Information.
- ---------------------------
None.
Item 6. The following is a list of all exhibits filed as part of this Form 10Q:
- --------------------------------------------------------------------------------
(a) Exhibits
21 List of subsidiaries
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer of its Manager, Eaton Vance Management thereunto duly
authorized on May 15, 2001.
BELAIR CAPITAL FUND LLC
(Registrant)
By: EATON VANCE MANAGEMENT,
its Manager
By: /s/ James L. O'Connor
----------------------------
James L. O'Connor
Vice President
By: /s/ William M. Steul
-----------------------------
William M. Steul
Chief Financial Officer
19
EXHIBIT INDEX
21 List of subsidiaries
20